Evaluating Loss Contingencies in the COVID-19 Era

The investor community and regulators closely scrutinize the accounting for and disclosure of pending lawsuits and government investigations because of the substantial potential impact on companies.

Because the COVID-19 pandemic creates growing uncertainties and economic instability, scrutiny in this area is likely to increase as the true costs of the pandemic are revealed.

Companies and their legal counsel, following generally accepted accounting principles, are presumptively required to make judgment calls about contingent losses arising from pending or anticipated litigation and regulatory or law enforcement proceedings or investigations.

With limited time and information, companies must evaluate and determine whether the likelihood of a contingent loss is remote, reasonably possible, or probable and, if possible, develop an estimate (or range of estimates) of the potential loss.

Since these are judgment calls, it comes as no surprise that these accounting decisions are actively litigated and continue to be a subject of compliance and enforcement interest today.

Over the last year, there have been multiple class action lawsuits alleging that companies have failed to properly account for and disclose contingent liabilities resulting in high-stakes litigation with multimillion-dollar exposures.

Yet to be seen is the extent of scrutiny resulting from the COVID-19 pandemic, which may require significant consideration as organizations begin and continue to communicate the expected impacts to their businesses.

This Law360 article offers some best practices to limit exposure to scrutiny by the investor community and regulators when accounting for and reporting on this nuanced area of GAAP.